Crude Oil

Oil Stays Near $41 As Traders Remain Optimistic On Recovery

Oil Video 04.08.20.

Additional Decline In Inventory Levels Is Required To Push Oil Prices Higher

A few days ago, WTI oil made an attempt to settle below the $40 level on worries about the continued spread of coronavirus and the resulting second wave of new virus containment measures.

The move turned out to be a one-day sell-off, and oil quickly returned back above the $40 level. However, oil struggles to gain additional upside momentum that will push it above the nearest resistance level at $42.50.

In the near-term, the main negative factor for oil is the spread of the virus which sometimes leads to new, limited lockdowns. Most likely, mass vaccination will not take place until 2021, so coronavirus will remain a major factor at least until the end of the current year.

On the other hand, inventories have started to decline while recent Manufacturing PMI data suggests that economic recovery continues around the world.

In my opinion, oil needs a material decline in inventory levels to have a chance to settle above $42.50.

Since the virus will likely continue to limit economic activity and mobility until the end of this year, the oil market needs to slowly work through excessive inventories to reduce pressure on oil prices.

Today, the market will have a chance to digest API Crude Oil Stock Change report which is expected to show that inventories have continued to decline.

While this report may not be sufficient enough to push oil above $42.50, it could provide more support for oil prices and position them for future breakout.

Current Oil Prices Are Likely Not Sufficient Enough To Boost U.S. Oil Production

Yesterday, we have discussed the recent Baker Hughes Rig Count report which indicated that the number of U.S. rigs drilling for oil declined by 1 to 180.

Tomorrow, EIA wil release its Weekly Petroleum Status Report which will show whether U.S. production has increased from the previous level at 11.1 million barrels per day (bpd).

At this point, it looks that U.S. firms are not ready to significantly increase production when WTI oil is near the $40 level.

Investors and creditors are very focused on balance sheet strength so firms are forced to limit their ambitions in order to maintain access to equity and debt markets which provide vital support at times of low oil prices.

In case the upcoming report shows that U.S. oil production remained flat at 11.1 million bpd, oil may get additional support since such report would indicate that weeks of $40 oil were unable to move production higher.

For a look at all of today’s economic events, check out our economic calendar.